Glossary

Impossible trinity (trilemma)

A country cannot have all three at the same time: a fixed exchange rate, free movement of capital across its borders, and an independent monetary policy. It can have any two. Robert Mundell set out the underlying logic in 1963, and Maurice Obstfeld and Alan Taylor later formalised it as the policy 'trilemma' that every open economy faces. The classical gold standard chose fixed rates plus capital mobility, and gave up policy autonomy. The post-1971 floating regime gives up the fixed rate to keep policy independence with open capital accounts. China for decades chose policy autonomy plus a managed peg, and used capital controls to square the circle. The trilemma is one of the few genuinely ironclad results in international finance — every monetary regime is an answer to which of the three a country is willing to sacrifice. The dollar's reserve role and the local-currency settlement debate on this site both sit inside this frame.